Monday, August 2, 2010

Radical Taxation Idea

I've been mulling over this for a bit; I'm not sure if it's actually a good idea, but it's an interesting idea. If anyone has any historical examples of if/how this would actually work, or specific negative consequences they can extrapolate, please comment; I'd be very curious.

Anyway, here's the idea: replace all taxes at the federal level with a fixed, Constitutionally-limited 2% annual tax on all [non-retirement] net assets, for all individuals and corporate entities.

Effects on people (generally):

- Low-income, low net-worth individuals will experience little change: they pay low taxes currently and in the new plan
- High-income, low net-worth individuals (people who spend almost all they make) will benefit: lower taxes on income will mean more spending power
- Low income, high net-worth individuals (significant savings relative to income) would pay more in taxes, but only after a high threshold: someone who made $100k/yr and paid $40k/yr in taxes would need to have a net worth of more than $2 million before the tax bill would be higher under this plan
- High income, high net-worth individuals would probably pay similar taxes, depending on exact numbers

The people who would pay significantly more are people with significant worth relative to income; eg: people who inherits millions, people who get very wealthy from stock/investments, etc. On the other hand, people with significant net worth usually make income from investing their money, so as long as they are making more than the tax amount on investment income, their net worth would not necessarily decrease, even if they do not have net income from business.


This type of tax would always be imminently affordable: since it's based on net wealth, the person/corporation paying will always have the assets to afford the tax. Since it's based on net assets, you don't pay more if you are leveraged to buy something (eg: house with a large loan): you are taxes only on net worth of your total assets.

Corporations would have less incentive to retain profits. Since retained assets would be taxed and dividends would be not taxed (opposite of current situation), corporations would be incentivised to only retain money they actually think they will imminently need, and pay out the rest to shareholders.

Net asset value is less variable than income/other, which means tax rolls will be much more predictable. Tracking net assets would be roughly equivalent to tracking income. The government needn't be concerned with private or intrastate transactions for tax purposes. Banks and investment institutions can aggregate reporting requirements for tax purposes.

This plan would constitute more explicit wealth redistribution than our current tax scheme, although I don't think it would be a significant problem, as long as the Constitutional low limit is solidly maintained (I would not be in favor of this plan without such a limit). It basically constitutes the same wealth redistribution mechanism/effect as inflation, but without the incentive to diversify out of the US dollar, and/or hold assets in tax deferred or unrealized-gain holdings. It would provide a slight negative-incentive to horde wealth, but as described, the actual tax consequences would be lower for most people, and the average spending power for people with income from employment would be higher.

This would effectively allow everyone (individuals and corporations) to deduct all operational expenses from tax liability, as opposed to the current system which favors corporate structure/operations for that benefit. Since you're only taxed on retained net assets, money expended to satisfy operational costs would not be taxed, either as income or otherwise.

2% should be close to enough, if not actually enough, to fully fund the federal government at current levels. 2% of net asset value of all households and nonprofit organizations would be roughly $1 trillion per year. Adding in taxes for all corporate net assets, and the figure should approach $2 trillion. The tax figure would rise directly and proportionally with the actual wealth level of US people/corporations, which is exactly what we want for incentive for the government. Moreover, as mentioned, the number changes slowly, so it's much less susceptible to economic fluctuations than the basis's of current tax schemes.

Anyway, that's my radical idea for the day; thoughts welcome as always.

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